Page 104 - DMGT546_INTERNATIONAL_TRADE_PROCEDURE_AND_DOCUMENTATION

Unit 5: Methods of Financing Exporters and Business Risk Management

10. LIBOR stands for ................................. which refers to the rate of interest at which banks are Notes
ready to lend money to each other in London’s inter-bank market.

5.4 Factoring

Forfeiting and factoring are services in international market given to an exporter or seller. Its
main objective is to provide smooth cash flow to the sellers. The basic difference between the
forfeiting and factoring is that forfeiting is a long-term receivables (over 90 days up to 5 years)
while factoring is short termed receivables (within 90 days) and is more related to receivables
against commodity sales.
5.4.1 Forfeiting

The terms forfeiting is originated from an old French word ‘forfeit’, which means to surrender
ones right on something to someone else. In international trade, forfeiting may be defined as
the purchasing of an exporter’s receivables at a discount price by paying cash. By buying these
receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment
from the importer.
Forfeiting in International Trade

The exporter and importer negotiate according to the proposed export sales contract. Then the
exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details
about the importer, and other necessary documents, forfeiter estimates risk involved in it and
then quotes the discount rate.
The exporter then quotes a contract price to the overseas buyer by loading the discount rate and
commitment fee on the sales price of the goods to be exported and sign a contract with the
forfeiter. Export takes place against documents guaranteed by the importer’s bank and discounts
the bill with the forfeiter and presents the same to the importer for payment on due date.

Documentary Requirements

In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflected
in the following documents associated with an export transaction in the manner suggested
below:
Invoice: Forfeiting discount, commitment fees, etc. needs not be shown separately instead,
these could be built into the FOB price, stated on the invoice.
Shipping Bill and GR Form: Details of the forfeiting costs are to be included along with
the other details, such FOB price and commission insurance, normally included in the
“Analysis of Export Value” on the shipping bill. The claim for duty drawback, if any is to
be certified only with reference to the FOB value of the exports stated on the shipping bill.

Cost Elements of Forfeiting

The forfeiting typically involves the following cost elements:
1. Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’ commitment to
execute a specific forfeiting transaction at a firm discount rate with in a specified time.
2. Discount fee, interest payable by the exporter for the entire period of credit involved and
deducted by the forfeiter from the amount paid to the exporter against the availed
promissory notes or bills of exchange.

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